Retirement Savings:

Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants

GAO-09-641: Published: Sep 4, 2009. Publicly Released: Oct 5, 2009.

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American workers increasingly rely on defined contribution (DC) plans like 401(k) plans and individual retirement accounts (IRA) for retirement income. Together with other DC plans--401(a), 403(b), and 457 plans--these accounts hold about $7.1 trillion. As workers accrue earnings on their investments, they also pay a number of fees that may significantly decrease retirement savings over the course of a career. GAO examined: (1) the types of fees charged to participants and investments of various DC plans; (2) how DC plan sponsor actions affect participant fees; (3) how fee disclosure requirements vary; and (4) the effectiveness of DC plan oversight. GAO reviewed laws and regulations and consulted with experts, federal officials, service providers, and six plan sponsors.

Participants in DC plans and IRAs generally pay the same types of fees, regardless of the plan in which they are enrolled, such as investment management fees. However, participants in some plans are more likely to invest in products that may have higher fees. For example, we found that participants in 403(b) plans and individual IRAs are more likely to invest in products like individual variable annuities or retail mutual funds, which frequently charge more than other investments. According to experts, one reason for the different investments is that many 403(b) plan sponsors do not make group products available to participants. DC plan sponsors generally take certain actions that decrease participants' fees. Sponsors can help reduce participants' fees by, for example, offering cheaper investment products in which participants may choose to invest, like low-cost mutual funds. Sponsors may also pool assets to obtain pricing advantages. 401(k) and 401(a) plan sponsors frequently pool participants' assets to realize lower fees in mutual funds, but sponsors of 403(b) plans often do not. Instead, many 403(b) plan sponsors keep sponsor involvement to a minimum, which limits the opportunities to pool assets and decrease fees. Fee disclosure requirements vary depending on plan regulations and investment regulations. Sponsors of plans subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA)--which was enacted in part to protect the interests of employee benefit plan participants--are required to disclose certain documents to participants, which may or may not describe fees. For plans not subject to these laws, such as state and local government plans, some states impose disclosure requirements, and some do not. Fee disclosure requirements also vary based on the type of investment product in which participants invest. The Securities and Exchange Commission regulates some investment products, like mutual funds, while others are regulated by states' insurance agencies. Because different regulators require different disclosures, participants in DC plans and IRAs can invest in similar products but receive different information on fees. Labor oversees disclosure for participants of certain DC plans, while IRS oversees tax laws that underlie all DC plans, but both lack information that could strengthen oversight. Labor is responsible for enforcing requirements for disclosure--which may include fees--and the requirement that fiduciaries for some plans must ensure reasonable fees, and has proposed regulations to improve fee disclosure. However, Labor does not have the specific authority to collect information to help ensure that sponsors of certain 403(b) plans continue to protect participants' interests. While IRS does not oversee fees or fee disclosure, IRS oversees DC plans' compliance with the tax code. IRS does not collect information to easily enforce 457(b) plans' contribution limits and detect violations that may reduce federal tax revenue. In addition, IRS and other regulators do not routinely share information with one another to use resources effectively and help enforce a rule requiring reasonable fees.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: As of August 2013, Congress has not considered this matter.

    Matter: Congress should consider amending ERISA to require sponsors to disclose fee information on each investment option in the plan to participants in a consistent way that facilitates comparisons among the options not only for 401(k) plans, as we have previously suggested, but for all DC plans subject to Title I of ERISA. In addition, to help ensure participants in all DC plans receive consistent fee disclosure, Congress may wish to consider state approaches for fee disclosure to participants in non-Title I plans as models for federal requirements for ERISA plans.

  2. Status: Closed - Not Implemented

    Comments: As of August 2013, Congress has not considered this matter.

    Matter: Given the absence of direct oversight of safe harbor 403(b) plans, Congress may wish to consider giving Labor the specific authority to collect information to systematically monitor safe harbor plans, which will allow Labor to determine whether any safe harbor 403(b) plans are operating outside the safe harbor guidelines and are subject to Title I of ERISA.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In 2012, IRS added a link to the Department of Labor's web site to refer information-seekers to potentially fee-reducing information. The link - posted on IRS' "Site Map - Retirement Plans Community" web page - takes viewers to Labor's main page. Links to more specific Labor guidance or Labor web pages designed for retirement plan sponsors would further enable sponsors to locate information that may help reduce fees for participants. Labor stated that it has issued two fee disclosure regulations that it believes will help plan sponsors decrease participant fees by helping them to better understand, negotiate, and monitor the plan fees and expenses that are borne by participants and beneficiaries. First, Labor published a final regulation in 2010 under ERISA section 404 requiring that employers and other plan administrators disclose information about plan investments, fees, and expenses to certain workers. In 2012, Labor stated that it published the final regulation under section 408(b)(2) of ERISA requiring covered service providers, such as recordkeepers and brokers, to disclose to pension plan sponsors the services they provide, information on direct and indirect compensation they will receive, and, for certain covered service providers, information regarding certain expenses associated with plan investment options. Labor will separately publish a proposed amendment that may require covered service providers to supply plan fiduciaries with a guide or similar tool to assist fiduciaries in quickly locating the required disclosures. This rule was finalized and, in FY13, EBSA confirmed that it will be implemented.

    Recommendation: To encourage plan sponsors to take actions that result in participants paying lower fees, the Commissioner of Internal Revenue, together with the Secretary of Labor, should provide guidance designed for sponsors of all types of DC plans to suggest ways sponsors can cost-effectively decrease participants' fees.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: In 2012, the Department of Labor stated that it has issued two fee disclosure regulations that it believes will help plan sponsors decrease participant fees by helping them to better understand, negotiate, and monitor the plan fees and expenses that are borne by participants and beneficiaries. First, Labor published a final regulation in 2010 under ERISA section 404 requiring that employers and other plan administrators disclose information about plan investments, fees, and expenses to certain workers. In 2012, the Department published the final regulation under section 408(b)(2) of ERISA requiring covered service providers, such as recordkeepers and brokers, to disclose to pension plan sponsors the services they provide, information on direct and indirect compensation they will receive, and, for certain covered service providers, information regarding certain expenses associated with plan investment options. Labor also planned to separately publish a proposed amendment that may require covered service providers to supply plan fiduciaries with a guide or similar tool to assist fiduciaries in quickly locating the required disclosures. The Department reported that it is working this project through the necessary clearance channels for submitting the proposed 408(b)(2) amendment to OMB. The final version of this amendment will likely be a significant step forward in helping plan sponsors to cost-effectively decrease participants' fees. In addition, in 2012, IRS stated that it provided a link to Labor's web site containing materials that would help plan sponsors learn about fees. In FY13, the final rule passed and EBSA confirmed that it will be implemented this year.

    Recommendation: To encourage plan sponsors to take actions that result in participants paying lower fees, the Commissioner of Internal Revenue, together with the Secretary of Labor, should provide guidance designed for sponsors of all types of DC plans to suggest ways sponsors can cost-effectively decrease participants' fees.

    Agency Affected: Department of Labor

  3. Status: Closed - Implemented

    Comments: Consistent with our recommendation, IRS changed a form to collect information employer type. Employers submit the W-3 form along with the W-2. In 2012, IRS began collecting information in the W-3 to distinguish between 457 governmental and 457 tax-exempt plans.

    Recommendation: To be able to provide improved oversight and ensure participants are not violating tax deferral limits, the Commissioner of the Internal Revenue Service should collect information to allow them to easily differentiate between types of 457 plans.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Not Implemented

    Comments: IRS stated that they will continue to look for opportunities to work collaboratively with federal regulators. In appropriate cases, they will cooperate in a carefully structured way with such agencies, tailored to the characteristics of each situation. However, as of August 2013, Treasury did not establish an MOU or identify opportunities it took to work collaboratively with regulators.

    Recommendation: To help ensure that information about service providers' violations is shared with financial regulators, the Commissioner of the Internal Revenue Service should work with financial regulators to establish a formal memorandum of understanding. Such a memorandum would help instruct agents and would be appropriate for limited occasions when information on service providers can be shared without revealing protected taxpayer information. In addition, the agencies should periodically review and update the memorandum, as appropriate.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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